What’s in a Car Payment?
Car payments come in all shapes and sizes from leases to loans to balloons; from new cars to used cars to certified pre-owned; from two years to seven years – and those are the simple things. Calculating a car payment involves more than simple math. The annual average car payment in the United States has increased over the last two years. In 2019, the average U.S. car payment for a new vehicle was $554 and $391 for a used car, while the lease payment average was $457. These amounts are up from 2018. Two years ago, a new car payment averaged $530, while a used car payment averaged $381 and lease payments were also lower at $430.
So, what’s really in a car payment?
Rebates and Incentives
The first option to consider is whether the car manufacturer (OEM) and, in some cases, a third-party bank is offering any rebates, incentives or subvented interest rates. These are often used to entice the buyer into the showroom. It is also important to consider the trade-in as well as the consumer’s credit score. These options will impact the final price of the vehicle.
Lender
Ninety-three percent of all vehicle purchases need financing. The buyer will have to decide how many years they would like to finance/lease the vehicle, typically ranging between two to seven years. Rarely is this an apples-to-apples comparison from one lender to another. In my experience, there can be some ambiguousness at this point in the buyer journey. Additionally, the lender will factor in any subvented rates they have, the buyer’s credit score as well as new or used car interest rates. While new car rates differ by very little, used vehicle rates can vary from 5% to over 10%. The differences in used vehicle rates depend on the year of the vehicle, the consumer’s credit score and mileage of the vehicle. The lower the credit score the higher the interest rate. These reasons alone make estimating a car payment quite challenging.
Dealer
The dealer also has an effect on determining the monthly car payment. A major portion of this interaction is based on the selling price of the vehicle which is negotiable. This can be affected by who is doing the financing and other variables. Dealers like to handle the financing and sometimes this is used to impact the price or other aspects of the loan or payment.
State
Regardless of the finance terms or whether the vehicle is new or used, no transaction is complete without factoring in taxes. Most buyers rely on the local DMV to provide the local, state and county taxes as well as titling and licensing fees. It’s almost always an afterthought factored in once an agreement has been reached on the selling price of the vehicle. In instances like this, the taxes may bump the customer’s monthly payment out of their comfort range.
Consumer
The last factor in pricing is the consumer. The biggest way consumers influence the price of the vehicle, outside of things like a trade-in and balance owed, is by how much cash they put down on the vehicle. Obviously, the more they put down, the smaller the loan or lease amount will be.
Evidently, there is a lot that goes into calculating a monthly car payment. In addition, there is also something to be said about a dealer’s ability to confidently advertise an exact monthly car payment for each vehicle in their inventory. How is this possible? Technology. OEMs and dealers should invest in the use of technology built specifically for payment calculation in the automotive industry. Here are my specific reasons why –
- To confidently advertise exact and to the penny payments on every vehicle in inventory
- To efficiently sell more vehicles
- To consistently offer a seamless customer experience to the buyer
In the most simplest of terms, OEMs and dealers want to sell vehicles and customers want to buy them. The sticking point – the car payment. If you successfully eliminate the sticking point, both the dealer and the customer win.
